Here's a further explanation of how the way we pay our bills, what we buy and how we handle our credit cards can affect our finances and our future.

First of all, this explanation is intended for those of us who have difficulty making it from one paycheck to the next. If you are already a multimillionaire, I'm sure that you don't need to read this. ☺

CHOICES

When we get our paycheck, most of us find that the biggest part of it is used up paying for rent and for bills. Some of the things that we buy are essential for our survival, such as food and basic clothes. We buy other things for pleasure, such as a stereo, a new TV, a vacation, etc.

So we have some choices we can make about how we spend the limited money we earn.

For example, we can spend the money we have left after paying for essentials on something we see in a store today, or we can save it for future enjoyment, such as saving for a vacation, purchasing a house or for our children's education.

The choices we make today will determine the kind of future we will have tomorrow.

Let's look at one important choice, whether to continue renting or to buy a home.

ADVANTAGES TO BUYING A HOME

There are some great personal satisfactions to owning a home. For example, the freedom to live in it as we like, without restrictions from a landlord. Also the prospect of owning it free and clear in the future when the loan is paid off.

But there are also important financial advantages to owning a home. One is the advantage that we can deduct the interest we pay on our mortgage from our income when we calculate our taxes. We can't deduct our rent, but most of our mortgage payment should be deductible.

Another financial advantage is that, if we live in the home for at least two years, the profit when we sell will be tax free up to $250,000 for a single person or $500,000 for a couple. Thus for most home owners in the Joplin, MO area, they will pay no taxes on the appreciation in value when they sell.

That appreciation in value can then help to fund the purchase of a larger house, our children's education, our retirement or the fulfillment of some other dream.

Let's suppose that we have decided that we do want to purchase a home.

FINANCING A HOME

If we have $40,000, $50,000, $100,000 or $200,000 in our savings account, we can just pick out the home we want, pay for it in cash and live happily ever after.

However, most of us don't have the money saved to buy a home for cash.

Fortunately there are banks and other lenders who are willing to lend us most or even all of the money we need to buy the home we have selected.

Of course, there are several catches. We will have to pay the lender interest on the money, and we will have to make regular payments on the loan or mortgage. Otherwise, the lender will take the house back and resell it to recoup the money he has loaned us.

QUALIFYING FOR A LOAN

Also, the lender will check our our financial background and decide if he can count on us to repay the loan. He will want information like our income, our monthly expenses, our current debts and how we have paid our bills and debts in the past. If we can't convince the lender to trust us repay the money, he won't give us the loan to buy the house.

IMPORTANCE OF OUR CREDIT SCORE

One very important thing the lender will look at in evaluating our credit worthiness is our credit score. There are three national credit bureaus who keep records on all of us and how we pay our bills and debts. When we make an application for a loan to buy a house, the lender will order a report from one or all of these credit bureaus. The report will have a lot of details on our past financial transactions, and it will also have a numerical score, which is called our credit score.

Our credit score is a grade on our past financial performance, just like the grade we get in a class in school. But our credit score is a number, not a letter, and the higher, the better.

If our credit score is high, the lender will likely give us the loan at a relatively low interest, because he will believe we are likely to repay the loan, based on our past performance.

If our credit score is low, the lender may not grant us the loan we are asking for, or, if he does, he will charge a higher interest rate. This higher interest rate can translate into an additional cost for the home of tens of thousands of dollars over the life of the loan.

Thus, if we decide we want to buy a home, we should do everything we can to get our credit score to as high a value as possible.

WHAT INFLUENCES OUR CREDIT SCORE?

Let's look at some of the things that influence our credit score.

First of all, if we have always paid in cash and never used credit, the credit bureaus may not have any records on us at all, and, therefore, they won't be able to give a credit report and a credit score on us. In that case, we probably won't get the loan.

So the first thing we need to do, if we want to qualify for a home loan, is to establish a credit record.

We should open a checking account, preferably at a bank that offers free checking, and pay our bills with checks so that we will have a record of our payments, especially our RENT PAYMENTS. Mortgage lenders are especially interested in seeing how we have handled our housing expenses.

Paying by check will always be accepted as proof of payment. Paying rent by cash or money order is usually not accepted by mortgage lenders as proof of payment.

CREDIT CARDS

We should also get a couple of credit cards and pay them off each month, so we don't carry a balance and pay large interest charges.

At the beginning, if we don't have a credit record, it will not be easy to get the common VISA and Master Card credit cards. One way to start establishing credit is to get what is called a "secured" credit card. That is a card for which we have to put up a deposit, maybe $250 for a $400 credit limit. Then the credit card companies are really loaning us our own money. But at least we can then establish a credit record.

Also, stores will usually grant a store credit card to someone with no credit history.

Once we establish a credit history, we can expect to get lots of offers for credit cards in the mail. Some of these will charge an annual fee. We really don't need a lot of cards, two for an individual should suffice.

We also may want to buy some item, perhaps a TV set or a piece of furniture and pay it off over time, maybe one year. We should be sure to make all the payments on time. This will establish our credit worthiness, and a home loan lender will look at us favorably because of this.

OUR CREDIT REPORT

We should also get a copy of our credit report, which we can from http://www.freecreditreport.com/, or from other sources.

If there are any invalid negative items on our credit report, such as disputed bills that we eventually paid or were cancelled, we can write to the credit bureaus and ask these items to be removed from our record. We can also contact the creditor to ask that these items be removed from our report. We should keep our credit report as clean as possible.

Another way to raise our credit score is to use only a small portion of the credit we have available. We should keep the credit we use below 30% of our credit limit. For example, if we owe $300 on a card, it will not hurt our credit score, if our limit is $1000. But if our limit is $400, this card will lower our credit score, even if we pay off the card every month.

So, we can raise our credit score by calling our credit card company and asking them to increase our limit, so we never use more than 30% of that lime. While we are at it, let's ask them to lower our interest and our annual fee, if we have one. This has been done successfully by other card holders, but it won't be done if we don't ask. Ask us today for a suggested script for these calls to a credit card company.

HELP IN INTERPRETING YOUR CREDIT REPORT

Hopefully, the discussion above will help you to understand some of the things that affect your credit score and your eligibility for a home loan.

If you want help in interpreting your credit report and in getting qualified for a home loan, we will be glad to help. Just call us:

Ray at 417-781-4600 / e-mail: ray@kronquist.com
Cary at 417-825-7398 (cell) / e-mail: yrac1@sbcglobal.net

SAVINGS

Another important step you should take in achieving financial security is to build up a financial reserve, three months of salary as a minimum, in the event that you lose your job or encounter some other emergency.

MAKING THE DOWN PAYMENT

Under most loan programs, the lender wants the buyer to put up some cash when buying a home. Either a down payment or at least a share of the closing costs. Ideally you have some cash saved so you do not miss getting the house of your dreams.

WORKING FOR THE DOWN PAYMENT

Even if you do not have the cash required by the lender, we may be able to help you. In some cases, we have hired home buyers to work on our other homes, so that they could earn the cash needed to buy their home.

LEARNING A TRADE

There can be a side benefit to working for your down payment. In helping us in renovating our other homes, the home buyer may learn a trade which enables them to significantly increase their income, either by hiring out to others as a contractor or by working on other jobs for us.

OUR BUSINESS PHILOSOPHY

These are some of the ideas that we hope will help you in buying your home and in making financial decisions for the future. We expect to have many more ideas as time goes on. ☺

Our business philosophy is that we hope to do much more than sell you a home. We hope to make your lives better as a result of your having worked with us.

PHILOSOPHY OF LIFE

Underlying everything we've said in the paragraphs above is our philosophy of life. What makes us happy? What things are important to us? What do we want our future to be like?

We live in a consumer oriented society. We are bombarded every day by ads urging us to buy this or that product.

However there is a conflict. Overspending on consumer items does not necessarily make us happier, and it can sabotage our future.

When we make the decision to work and save for a better future, we may have to give up some luxuries in the short term. For example, we might not buy that new car or golf cart or new clothes.

However that does not mean we have to suffer in the present to have a more secure future. What it does mean is that we need to be in touch with what does really make us happy.

So if we decide to reduce our spending on consumer items to save money for our future, we might spend more time playing with our kids instead of buying them electronic games.

Adopting the ideas on this web site may mean a change in lifestyle, but it does not have to mean suffering in the present. It does mean that we need to be clear on what makes us happy and what we want for our future. What we spend money on needs to be in line with our life philosophy.

DISCLAIMER

Finally, as a disclaimer, we are not attorneys, tax consultants, real estate agents or financial planners. We offer this information based on our personal experience in business and as investors. You should always consult the appropriate professional before making any important decisions such as the purchase of a home.

"RICH DAD, POOR DAD"

For a more thorough discussion of how the way you handle money affects your future, we heartily recommend the book by Robert Kiyosaki, "Rich Dad, Poor Dad". It is a short enjoyable book that will teach you a lot about money.

If you would like to learn more by playing a fun board game designed by Robert Kiyosaki called "Cashflow", call us to sign up for a free "Game Night."

Ray at 417-781-4600 / e-mail: ray@kronquist.com
Cary at 417-825-7398 (cell) / e-mail: yrac1@sbcglobal.net